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4 minute read
Market data has changed the way jobs are evaluated for compensation. In the past, organizations in the United States relied primarily on internal job evaluation methods to assess the value of a role based on its relative importance within the organization. Now with compensation data so much more readily available, most companies are looking beyond their walls to see how their pay practices compare to others in the market.
In this blog, we will explore both the external and internal job evaluation methods independently and discuss how you can strike a balanced approach.
Internal Job Evaluation: The Point Factor Method
There are many different ways to do an internal job evaluation. One of the most common techniques is the point factor method. At a very high-level, this involves identifying key compensable factors—such as skills, responsibilities, effort, and working conditions—and assigning each factor a weight and point value based on its importance to the company. The total points then determine the relative worth of a job within the organization.
One of the major benefits of the point factor method is the ability to promote internal equity. The point factor method is a clear, measurable way to evaluate each job, ensuring that roles with similar responsibilities and requirements are compensated equally. This fosters a sense of fairness across the organization.
However, relying solely on internal evaluations can be limiting. Maintaining internal equity is mission critical, but it’s not the only consideration in today’s market. That’s where market-based compensation comes into play.
External Job Evaluation: Market-Based Compensation
Market-based compensation is rooted in external job evaluation, which uses compensation data as a foundation to determine the market value of a job or group of jobs. With this approach, companies gather and analyze market data to assess how similar roles are being compensated and align employee salaries accordingly.
There are several advantages to this approach, a major one being market competitiveness. Regular assessment of the external labor market helps companies stay informed about salary trends and changes in demand, enabling them to make more timely adjustments that attract and retain talent.
However, a successful market-based approach depends on having access to relevant, reliable compensation data, as well as a process to manage, analyze, and update that data regularly. Without this in place, it can become easy to make misinformed or out-of-date compensation decisions.
External job evaluation is commonly referred to as market pricing. Check out our comprehensive market pricing guide for more information.
The Need for a Balanced Approach
Many comp pros today are aiming for a hybrid approach that merges the best of both worlds—market competitiveness with internal equity—without overextending the budget.
A major driving force behind this shift is the rise of pay transparency, which has brought compensation out of the shadows and into the spotlight. More than ever before, comp pros need to make pay decisions that can withstand scrutiny. This has increased the demand for compensation data, because a data-driven approach not only provides a more comprehensive view of the market, but also allows comp pros to justify compensation decisions using evidence.
Pay transparency has also significantly amplified the importance of maintaining internal equity. With salaries being shared more openly, discrepancies are much easier to identify. Pay transparency is much more than just being legally compliant. It plays a critical role in shaping the employer brand and ability to attract, retain, and motivate talent.
Given this reality today, comp pros cannot ignore the external market completely. Even if they cannot pay at or above market rates, understanding where they stand helps identify gaps, adjust compensation strategies, and communicate more effectively with both stakeholders and employees.
At the same time, having an internal job evaluation process in place is crucial for maintaining internal equity. Having a consistent internal structure can help ensure that pay reflects the responsibilities, skills, and impact each role brings to the organization.
How do we find that balance?
A successful compensation strategy that strikes the right balance between external market competitiveness and internal equity requires 3 key components.
1. Use data that is both reliable and relevant
There is an abundance of data sources and data providers today, but not all of it will be reliable and not all of it will be relevant.
Reliable data is accurate and trustworthy, achieved through meticulous data collection, analysis, and validation, as well as transparency in the methodologies used. Traditional surveys are still considered to be the gold-standard data source in terms of reliability, but even then you need to identify the right survey(s) for your company.
Comp teams not only need to choose between traditional surveys, but also have a variety of alternative data sources to consider. Each of these data sources have their own pros and cons. To help you navigate this landscape, we’ve put together a guide evaluating traditional surveys alongside four alternative data sources— crowdsourced, job posting, aggregated, and offers— based on the key market pricing dimensions: volume, density, recency, specificity, and defensibility.
Additionally, our recent webinar brought together comp pros to discuss use cases and best practices for leveraging data. Some of the main takeaways from that session include: 1) making sure the data you choose aligns with your business needs and 2) selecting data sets that are relevant to your company profile (eg. companies of similar size and industry).
Using reliable and relevant data as the foundation for your compensation strategy is vital for effectively balancing market competitiveness with internal equity. This solid groundwork helps ensure that your compensation decisions align with your company goals and are justifiable, fostering trust within your organization.
At BetterComp, we partner with best-in class data providers to bring your reliable, relevant data. For companies of 1000 employees or fewer, BetterComp Prime brings small and mid-sized teams defensible data powered by Mercer, tailored just for them, plus the BetterComp technology to make it actionable.
2. Conduct regular reviews
With compensation, it’s rarely one-and-done. Regular reviews of your company’s pay philosophy and strategy can help maintain market competitiveness and internal equity by enabling you to:
- Stay in tune with market trends
- Identify gaps and disparities earlier
- Make sure pay practices remain aligned with company goals
- Make necessary adjustments in a timely manner
Having a pre-established schedule for conducting reviews can help maintain accountability. At the minimum, pay practices should be reviewed at least once a year but this should increase during any moments of significant organizational or economical change (eg. mergers & acquisitions, rapid growth, and more).
3. Leverage a Technology Partner
Compensation decisions have a direct impact on a company’s bottom line. This is a lot of pressure on comp pros, but you don’t have to navigate this alone. Leveraging the expertise and resources of a technology partner can make all the difference here.
The key here is to work with a technology partner and not just a software vendor. The right technology will provide the capabilities to do your job more effectively and efficiently - whether that is automating manual tasks, providing robust reporting, enabling smooth integrations or more.
The right partner will provide industry expertise, tailored support for your company’s unique challenges, and foster a long-term relationship focused on continuous improvement.
At BetterComp, we are built by comp pros for comp pros and we take pride in being your technology partner for all your market pricing needs. However, we understand that your compensation needs may go beyond just market pricing. In that case, we have a vetted partner ecosystem of exceptional survey providers, data, technology, and service providers that can support your needs.
